Debt-to-Income Ratio and its Role in Repaying Personal Loans
Whenever you apply for credit one of the first things that a lender will do is to analyze your DTI (Debt to Income) to ensure that an appropriate decision is made and to give them confidence that you can indeed pay back the debt. A team will calculate debt to income ratio for your pending inquiry as part of the process. This information is considered just as important as other more well understood metrics such as employment stability and history of credit.
Understanding DTI (Debt to income ratio)
To calculate debt to income ratios one must be able to understand the fundamentals of what it consists of. Essentially if an individual's financial obligations that are debt-orientated are compared to the financial income of a person this combination unlocks a debt to income ratio or DTI for short.
Debt Obligations Monthly
These include credit cards, personal loans, car payments, mortgage payments and in some cases phone bills (if it includes a debt related program for the purchase of the phone) other expenses like food, utility, gas and things that are not systematically debt related do not go into the calculations for the debt to income ratio that is used in your process.
Gross Income Monthly
This is the total amount of revenue that you are generating each month, this is not the figure after taxes are taken into consideration, rather it is the overall stream of income that is calculated for the debt to income ratio
Calculating Your Debt to Income Ratio
The general process of calculating your debt to income ratio consists of taking the monthly debt payments that are made and dividing it with your gross income. As an example if a person is spending $1000 each month on debt related payments and has a $3000 gross income the debt to income ratio is 20%.
Why is the debt to income ratio considered important from the perspective of lenders?
When a team of professionals that work at a lending institute are working to determine whether or not an applicant is going to be approved or not for a loan or a line of credit of some sort, that debt to income ratio is considered one of hte main and most important aspects of the decision making process. This is for the simple fact that if a person is paying most of their gross income to various debts they are essentially swimming up-stream metaphorically and are stretching themselves thin financially. If a person has a high debt to income ratio it says unflattering things about the financial state of that individual and can be considered a major red flag.
Are you wondering how your debt to income ratio with affect your ability to get a personal loan approved?
If you have any concerns or specific questions regarding your debt to income ratio and how or if it will affect your loan approval process you can contact one of the trained professionals ate Gold West Financial for a free call to discuss your specific situation and how to help streamline your process for a approved personal loan.